The FHA Streamline Refinance : 3 Ways To Reach More U.S. Households
Since 2006, the number of purchase money loans made via the FHA has increased 6-fold. Last year, the FHA insured 30% of all purchase money mortgages. This is because FHA mortgage rates have remained low, and the FHA offers a 3.5% downpayment program that is unequaled by Fannie Mae or Freddie Mac.
The only other low-downpayment mortgage programs are via the USDA and the VA and both have special qualification standards.
For FHA-backed homeowners, though, it's more than just the FHA low-downpayment mortgage that's a boon to household finances -- the FHA Streamline Refinance is a pretty good perk, too.
About The FHA Streamline Refinance
The FHA Streamline Refinance is a unique mortgage product, available to homeowners with existing FHA home loans. The program was built to be the fastest, simplest way for an FHA-insured homeowners to refinance their respective mortgages.
The FHA Streamline Refinance's big draw is its leniency.
For homeowners using the FHA Streamline Refinance program -- according to the FHA rulebook -- income is not verified; employment is not verified; and, credit scores are not verified.
So long as an FHA-backed homeowners makes his mortgage on-time payments for a period of at least 12 months, a mortgage approval is all but guaranteed.
That said, not everyone gets approved for the FHA Streamline Refinance. Notably, there are 3 groups of homeowners for whom the FHA Streamline Refinance remains out of reach.
- Those that meet the FHA Streamline Refinance guidelines as written by the FHA, but fail to meet the FHA Streamline Refinance guideline overlays required by their bank
- Those that are approved for an FHA Streamline Refinance, but don't have the cash required to start a new escrow account for real estate taxes and homeowners insurance
- Those that meet the FHA Streamline Refinance guidelines, but want to reduce their loan term to 15 years; or move from a non-adjusting ARM to a fixed-rate mortgage
Perhaps the FHA could take a page from the government's HARP refinance program, and work to make more homeowners eligible for its flagship FHA Streamline Program.
Force Banks To Remove FHA Streamline Refinance Overlays
The FHA Streamline Refinance is the most lenient mortgage product in the market today. There are almost no verifications required.
The FHA's stance is that -- irrespective of your credit score or your employment status -- if you're making payments on your mortgage at your current mortgage rate, you're likely to keep making payments on your mortgage if that mortgage rates were lower. This is about as "common sense" as mortgages get.
Lenders, however, don't underwrite to the FHA's Streamline Refinance program guidelines. Instead, lenders add additional qualification standards for FHA Streamline Refinance applicants to clear. In industry parlance, these are called "investor overlays" and, for the FHA Streamline Refinance, overlays can include any of the following :
- Verifying an applicant's current employment status and 10-year employment history
- Verifying an applicant's income to make sure minimum debt-to-income ratios are met
- Verifying an applicant's credit scores to make sure FICOs are 640 or higher
These overlay hurdles aren't high, necessarily, but they manage to stymie loads of otherwise-qualified FHA Streamline Refinance applicants; people that have never been late on a payment who want some payment relief; people who meet the FHA's standards but don't meet their lender's standards.
Now, the reason the banks raise standards beyond FHA requirements is because the FHA holds banks responsible when they make "bad loans". When banks make too many bad loans, the FHA fines the bank and may revokes their FHA lending license. Banks don't want any part of that risk.
If the FHA would absolve lenders of certain risks associated with underwriting FHA Streamline Refinances, many more Americans would be streamline-eligible. Until then, the FHA Streamline Refinance will be a limited-access program.
Allow Homeowners To Finance Tax And Insurance Escrows
Another hurdle for refinancing households is that the FHA Streamline Refinance guidelines place tight reins on a borrower's loan size. Based on the FHA's rules, a homeowner's post-FHA Streamline Refinance mortgage balance may not exceed its current mortgage balance, except for the cost of FHA upfront mortgage insurance.
With an FHA Streamline Refinance, all mortgage closing costs and all prepaid items (e.g.; prepaid interest, tax escrow), therefore, must be paid in cash at the time of closing. They may not be added to the loan size.
This helps to explain why zero-closing cost FHA Streamline Refinances are so common.
With a zero-closing cost FHA Streamline Refinance, the mortgage lender pays all loan closing costs on behalf of the homeowner, which reduces the amount of cash that the homeowner needs to bring to closing. The credit can't always cover tax and insurance escrows, though, and in states with high real estate taxes, depending on the time of year, prepaid items can run $9,000 or more.
Not many homeowners have that type of cash on-hand. And, because the FHA won't let them add it to the loan amount, they find themselves unable to refinance.
If the FHA changed its FHA Streamline Refinance guidelines to allow "adding escrows to the loan balance", more FHA-backed homeowners would be eligible to use the FHA Streamline Refinance program.
Waive Certain Net Tangible Benefit Requirements
The FHA Streamline Refinance is designed to help FHA-backed homeowners save money, but the FHA wants to protect against frivolous refinancing. As such, one of the FHA Streamline Refinance requirements is that homeowners must realize a benefit via the refinance.
In general, the FHA wants every refinancing homeowner save at least 5% on their monthly mortgage payment.
The FHA calls this 5% savings requirement a "Net Tangible Benefit". The 5% is calculated by adding your current (principal + interest) to your current monthly mortgage insurance payment and then comparing that figure to the same three inputs on your new mortgage.
If the new mortgage payment isn't at least 5% less than the current one, there's no refinance allowed.
A modest mortgage rate reduction is often enough to meet the FHA's 5% savings requirement. However, because of the Net Tangible Benefit mandate, it's virtually impossible for homeowners to refinance from a 30-year fixed rate mortgage into a 15-year one; or for homeowners to refinance from a non-adjusting ARM into a fixed rate loan.
Homeowners can't FHA Streamline Refinance into a 15-year fixed rate mortgage because 15-year mortgage payments are higher than for comparable 30-year loan terms. Even though the mortgage rates are lower and the homeowner stands to benefit in the long-term, the FHA won't allow the refinance -- not if the mortgage payments increase, anyway.
Similarly, the FHA won't let homeowners with ARMs use the FHA Streamline Refinance to swap into a fixed-rate mortgage without meeting the 5% savings requirement. Some people would argue that refinancing from an ARM to a fixed rate mortgage is a "tangible benefit" and, as it turns out, the FHA agrees -- but only if that ARM is in its adjusting phase.
For homeowners with ARMs in their initial teaser phase, refinancing is near impossible.
If the FHA reclassified its Net Tangible Benefit to include "Reduce Loan Term" and "Convert To A Fixed Rate Mortgage", more FHA-insured homeowners would be eligible for, and would use, the FHA Streamline Refinance Program.
The FHA Streamline Refinance is an excellent program with lots of success stories. It remains the fastest, easiest mortgage refinance program in the country. With some small changes, however, the FHA could put its refinance program in the hands of additional U.S. homeowners, potentially lowering mortgage payments for hundreds of thousands of families nationwide.
With mortgage rates still this low, there's a lot of good that can be done.